By Tiernan Ray

Shares of Apple (AAPL) are down $3.87, or 0.9%, at $452.90, after Piper Jaffray’s Gene Munster this morning reiterated an Overweight rating, and cut his price target to $655 from $688, writing that investors are worrying too much about Apple’s gross margin, and that the shares can lift once new products come out, starting in the second half of this year.

We believe gross margin on the iPhone remains around 55%. This may be hard to believe given the drop in gross margin over the past year (from 42.8% in Jun-12 to 37.5% in Mar-13), but a closer look at Apple’s Mar-13 quarter suggests the negative trend in margin was been driven by mix of lower margin iPad Mini (which could be as low as 20% margin), along with a $414m impact from a combination of a change in the warranty policy in China and an “unfavorable adjustment” (no details on what this adjustment is). Subtracting the $414m from cost of goods improves the Mar-13 margin from the reported 37.5% to 38.4%. On a going forward basis, we believe the change in the China warranty policy will likely depress margins by 40-50 bps in each quarter based on the company disclosure of $224m in adjustments in the Dec-12 quarter. To further illustrate that the iPhone margin is stable, we calculated that if Apple did not sell any iPad Minis (20% margin) in Dec-12 or Mar-13, Apple’s overall gross margin would have risen to 40.2% in Mar-13, up from 39.7% in Dec-12.

Munster thinks investors are imagining a “nuclear meltdown” in Apple’s gross margin, bringing it as low as 32% by 2015, “including 50% cannibalization of the regular iPhone from the cheaper iPhone, a 15% margin on the cheaper phone, and a 10% margin on the TV,” alluding to speculation Apple will introduce a television set.

Munster performs his own calculations and estimates margin would fall only to 34% by 2015. That includes a 50% cannibalization of iPhone sales by the cheaper iPhone, at the lower 15% margin, and Apple taking 7% share of the “sub-$400″ smartphone market. He leaves out the impact of a television set, which he thinks could arrive later this year and, assuming a $1,500 retail price, would have a “modest” impact on profit margin, he argues, of perhaps 180 basis points next year, assuming a 10% profit margin.

Munster offers a table of potential margin impact from a television set:

Munster cut his fiscal 2014 estimates to $196 billion in revenue and $44.43 in profit per share, from a prior $201 billion and $46.40.

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There are 5 comments

MAY 10, 2013 3:34 P.M.

Anonymous wrote:

88 to 55. whats with the repeating digits Gene? Dart throwing?

MAY 10, 2013 4:09 P.M.

ron wrote:

CAN I GET A JOB AT YOUR COMPANY??????? it is easy to change your estimate after the stock goes up or down you guys are trying to milk the cow after it left the barn GET A NEW JOB

MAY 12, 2013 11:19 P.M.

Anonymous wrote:

Apple no longer has a unique product so margins would definitely drop. Apple no long is the most innovative so margins would definitely drop. Competitions are coming strong so margins would definitely drop. Macro factors are very obvious. You don't have to dig into the Micro factors to find comfort to face the reality.

MAY 13, 2013 2:10 A.M.

Apple is for grannies wrote:

Apple will always have a market. Among grandmas and grandpas. And technologically challenged people. Clever people know that Apple is overpriced c rap. If you need the hand holding of the Apple store staff rto turn your phone you should buy Apple c rap and pay for the store. Rest of us are paying for advanced technology, and dumping low tech Apple toys.

MAY 13, 2013 12:30 P.M.

Just Facts wrote:

Anyone who thinks Samsung is fan of android is mistaken, they are not(Tizen). They are not competing with apple, they already have the crown compared to any manufacturer. They are technology innovators hardware manufacturers. Apple still depends on them in terms of high quality, high volume hardware production. Apple have to outsource manufacturing period. The most unnecessary argument is whether apple or Samsung has the highest quality product finish (plastic versus metal conversation.) It is really laughable. Unless Apple establishes production plants in USA and manufactures its own hardware and totally cuts its dependency to Asian countries they are not complete. Every single apple product sold Samsung makes money. Every single Samsung product is sold apple makes 0 dollar. Apple is the crybaby of the industry that feeds off others inventions and innovations. The reason they are trying to establish a false perception as if they are the actual “innovators” is simply a distraction technique they have been pulling for decades unsuccessfully by suing companies around them who become successful (such as Microsoft and Samsung), they also inspired parasitic patent trolls to leach on start-ups, developers and even end users. Their success depends on ability to gather bits and pieces of other companies innovations and putting them together and call it as theirs (Xerox) They feed on uneducated consumer’s interest in new technology and do best they can to cripple their ability to question what’s good for them and lock them into their closed source operating environment providing nothing more than a average technology experience. When IOS was jailbroken Apple complained that it would cripple cellular towers. The company’s filing explained that jailbreaking could allow hackers to altering the iPhone’s BBP — the “baseband processor” software, which enables a connection to cell phone towers. They filed a 45 page complaint with library of congress copyright office in 5/8/09. 4 years have passed nothing has happened. Scare tactics unfortunately didn’t work for their self serving corporate interests. World is for humans and for other living organisms not for selfish monopolistic leeches. Open source software will win therefore Apple will lose. When all manipulated misinformed people wake up they will see how they have been milked by Apple. When that time come we all know it is freedom.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.